The title might sound crazy but that is exactly what Bloomberg News reported yesterday. A story on bloomberg.com states that bonds sold by Warren Buffett’s Berkshire Hathaway (BRK.A, BRK.B) are trading at “3.5 basis points less than Treasuries of similar maturity”.
The story is very strange. Treasuries are supposed to be the safest securities. They are considered a risk free return on your money. So why are Berkshire Hathaway’s bonds considered less risky than the US government’s?
I think the answer is that the US is issuing so much debt that people see more risk in owning US government debt than owning debt of a solid company with a fortress balance sheet like Berkshire Hathaway. The US debt level keeps climbing and it does not look like the budget will be balanced any time in the foreseeable future. Even if you believe the CBO estimates that the current bill will cut the deficit by 1.3 trillion over the next 20 years that is a drop in the bucket compared to the budget deficits are projected to be for at least the next ten years of approximately $10 trillion dollars. In addition it is almost impossible to predict 20 years in the future I find it comical that the CBO gives an estimate that far in advance.
Therefore I personally would feel more comfortable owning bonds from a company like Berkshire Hathaway than Uncle Sam.
However, I left out one detail that makes this really bizarre. The 3.5 basis spread is on two year notes from Berkshire Hathaway versus two year treasury notes. I do not think anyone is concerned about the US Government defaulting in the next two years even if they have concern this will occur in 10 or 20 years.
So why is this anomaly occurring in the bond market? I have two possible thoughts. One is that the market is going out of whack. This happens from time to time, although most of the time the market is efficient. Treasury notes should have lower yields than Berkshire notes but the market is making a mistake. Sometimes events could occur in the stock market, bond market, futures market etc. that defy all logic and reason. Perhaps, this could be a case of one of those situations.
My second reason thought is a simple issue of supply and demand. The US Government has been issuing record amounts of debt and has no plan to stop in the near future. The treasury has issued $2.59 trillion in debt since 2009 according to Bloomberg News. In addition there are signs that the Chinese are cutting down on the amount of our debt they will purchase (or they are at least threatening to). There might simply be too much supply and not enough demand. This would push the yield on the two year Treasury note to a level that would be atypical.
I am no expert in this field but this could present a good arbitrage operation assuming my first reason is correct. You can short Berkshire Hathaway two year notes and go long two year Treasury notes. Just a thought!
The full link to the Bloomberg article is here
http://www.bloomberg.com/apps/news?pid=20601087&sid=ayK1N3ffXarY
Disclosure: long Berkshire Stock
The story is very strange. Treasuries are supposed to be the safest securities. They are considered a risk free return on your money. So why are Berkshire Hathaway’s bonds considered less risky than the US government’s?
I think the answer is that the US is issuing so much debt that people see more risk in owning US government debt than owning debt of a solid company with a fortress balance sheet like Berkshire Hathaway. The US debt level keeps climbing and it does not look like the budget will be balanced any time in the foreseeable future. Even if you believe the CBO estimates that the current bill will cut the deficit by 1.3 trillion over the next 20 years that is a drop in the bucket compared to the budget deficits are projected to be for at least the next ten years of approximately $10 trillion dollars. In addition it is almost impossible to predict 20 years in the future I find it comical that the CBO gives an estimate that far in advance.
Therefore I personally would feel more comfortable owning bonds from a company like Berkshire Hathaway than Uncle Sam.
However, I left out one detail that makes this really bizarre. The 3.5 basis spread is on two year notes from Berkshire Hathaway versus two year treasury notes. I do not think anyone is concerned about the US Government defaulting in the next two years even if they have concern this will occur in 10 or 20 years.
So why is this anomaly occurring in the bond market? I have two possible thoughts. One is that the market is going out of whack. This happens from time to time, although most of the time the market is efficient. Treasury notes should have lower yields than Berkshire notes but the market is making a mistake. Sometimes events could occur in the stock market, bond market, futures market etc. that defy all logic and reason. Perhaps, this could be a case of one of those situations.
My second reason thought is a simple issue of supply and demand. The US Government has been issuing record amounts of debt and has no plan to stop in the near future. The treasury has issued $2.59 trillion in debt since 2009 according to Bloomberg News. In addition there are signs that the Chinese are cutting down on the amount of our debt they will purchase (or they are at least threatening to). There might simply be too much supply and not enough demand. This would push the yield on the two year Treasury note to a level that would be atypical.
I am no expert in this field but this could present a good arbitrage operation assuming my first reason is correct. You can short Berkshire Hathaway two year notes and go long two year Treasury notes. Just a thought!
The full link to the Bloomberg article is here
http://www.bloomberg.com/apps/news?pid=20601087&sid=ayK1N3ffXarY
Disclosure: long Berkshire Stock
